What is a crypto winter? Definition, duration and impact for investors
While cryptocurrency is a younger asset class, its overall performance appears to be somewhat cyclical, much like its more established peers. In other words, it experiences booms and busts similar to more traditional stocks like stocks and bonds.
Despite being younger than most Gen Zers, cryptocurrency has already experienced several major ups and downs characterized by high trading volume, wild volatility, and unfathomable gains and losses for those involved.
What is a “Crypto Winter?” Where does the term come from?
When the value of the cryptocurrency market as a whole declines by a significant percentage over an extended period, usually driven by major players like Bitcoin and Ethereum, many investors describe the recession as a “cryptocurrency winter.” A crypto winter is essentially the digital currency equivalent of a bear market in stocks.
The term was coined by South African data analyst and digital asset enthusiast Eugéne Etsebeth in 2018. At the time, Bitcoin, the most popular and largest cryptocurrency by market capitalization, had plummeted from a 2017 peak of nearly $ 15,000, then bottomed near $3,500 in early 2019.
Many have speculated that the inspiration for the term may have come in part from the popular HBO fantasy series, game of Thronesin which the concept of an impending winter of unusual length and severity is a central motif.
How long do cryptocurrency winters last?
If cryptocurrency performs like other asset classes (which it does, but with even more volatility), then crypto winters, like bear markets, likely come in all shapes and sizes. Since cryptocurrencies haven’t been around for a long time, we don’t have much data to look into.
The cryptocurrency winter that led to the coining of the term lasted nearly three years, from early 2018 to late 2020. At that point, cryptocurrencies began to skyrocket, with Bitcoin surpassing $60,000 a year. mid March 2021.
A much shorter decline in cryptocurrency prices followed, lasting from early May to mid-August of the same year. This downturn was so short-lived, however, that some would probably hesitate to call it a full-fledged cryptocurrency winter, instead calling it a simple pullback (which is interesting because this downturn was very close to the length of a real winter of about 4 months). ).
The cryptocurrency market began to slump again in late 2021, with Bitcoin falling from a mid-November high of nearly $65,000 to a low of around $17,000 in mid-November of 2022. As of late January 2023, the cryptocurrency market had yet to recover.
A timeline of Crypto Winters
- From the beginning of 2018 to the end of 2020 (~3 years)
- From early May to mid-August 2021 (~3.5 months)
- Early 2022 to present (1 year and beyond)
What Causes Crypto Winters?
Like most large-scale phenomena, crypto winters have no single cause, and different crypto winters are likely the result of different circumstances. That said, there are a number of factors that could reasonably be expected to contribute to a downturn in the cryptocurrency market.
- Inflation and rising interest rates: When the rate of inflation rises and the Federal Reserve hikes interest rates in response, investors tend to shift their money from riskier investments like tech stocks and cryptocurrencies to safer, interest-paying assets like bonds and preferred stock. This leads to a decline in the prices of those riskier assets. Rising interest rates and the general economic malaise are likely among the main factors contributing to the downturns in cryptocurrencies.
- Scandals and negative press: When something unfortunate happens in the cryptocurrency realm (scams and scandals are not uncommon in decentralized finance due to the low regulation to which cryptocurrencies are subject), investors take notice and it can affect cryptocurrency prices.
- Capitulation: Despite cryptocurrency’s original purpose as a store of value to be used as currency, most individuals and institutions treat cryptocurrencies as an investment, and investors are notoriously emotional. When the value of any investment begins to decline, a “herd mentality” can easily take hold of investors who are still long in the asset, triggering a wave of capitulation. As prices fall, more investors panic and sell, causing prices to fall further, and so on until supply and demand finally reach relative equilibrium.
How Does Crypto Winters Impact Investors and Institutions?
The most obvious impact of a crypto winter is the financial loss suffered by investors, both individual and institutional. During each crypto winter, DeFi evangelists whose portfolios are tied almost exclusively to cryptocurrency take devastating hits to their net worth, while investors with more diversified portfolios suffer more subtle losses depending on their asset allocations.
Job losses and business closures are another consequence of the prolonged downturns in the cryptocurrency market. During cryptocurrency bull markets, many new businesses tend to emerge in the realm of decentralized finance, mainly mining operations and digital exchanges. The allure of the “digital gold rush” is hard to ignore, and young companies ready to capitalize on the booming industry abound.
When cryptocurrency values plummet and stay low for extended periods, however, smaller and newer mining companies and exchanges often fail, and larger, more established operations have to cut costs by instituting mass layoffs.
Examples of layoffs at crypto companies
- Robinhood, a popular cryptocurrency (and stock) trading platform, laid off 8% of its workforce in April of 2022 and a further 23% in August of the same year.
- Coinbase, one of the most popular and long-established cryptocurrency exchanges, laid off 18% of its staff in June of 2022.
- Hodlnaut, a popular cryptocurrency lending platform, reduced its workforce by a whopping 80% in August 2022.
- In January of 2023, Crypto.com announced it was laying off 20% of its staff.
When will the current cryptocurrency winter end?
Bitcoin started falling from a high of around $65,000 in November of 2021. About a year later, in November of 2022, it reached a low of around $16,000. At the end of January 2023, it rebounded to around $23,000.
But will the current cryptocurrency winter end? Or will prices continue to fall until the market crashes altogether? With cryptocurrencies being such a young industry and so many financial professionals decrying digital currencies for lacking “intrinsic value,” it is certainly possible that cryptocurrencies will continue to lose value and eventually fall out of favor altogether.
On the other hand, so many individuals, businesses, and institutions have money locked up in the cryptocurrency world that once interest rates drop and inflation stabilizes, the industry (or at least major players like Bitcoin and Ethereum) could see a massive comeback. According to Luc Olinga of TheStreet, “While optimism appears to have returned, cryptocurrency prices are still far from their records set in the midst of the crypto craze in late 2021.”